WASHINGTON (Reuters) - Fannie Mae <FNM.N> and Freddie Mac
<FRE.N> would have to meet new goals to invest in troubled
loans and erase some mortgage debt for borrowers facing
foreclosure under legislation contemplated by a leading
Democratic lawmaker.

The two biggest sources of U.S. mortgage financing would be
required to buy troubled loans that had undergone a reduction
in their principal amount and could be forced to hold larger
reserves against those loans going bad, according to the
summary of a bill being drafted by Senator Christopher Dodd,
chairman of the Senate Banking Committee.

Those provisions are part of a broader proposal that would
expand the Federal Housing Administration and let it siphon
troubled home loans out of the housing finance system.

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The FHA is the nation's largest home-buyer assistance
program. It was conceived to help borrowers win better loan
terms by guaranteeing regular payments. The Depression-era
initiative meant to give first-time home buyers a boost has
lately been seen as a tool to save today's borrowers from
foreclosure.

Supporters of the plan expect mortgage investors will agree
to write off part of the troubled loans if it means the federal
government will take them off their books.

According to a summary of the bill, the write-down amount
would be determined by a special advisory board and the
government would finance no more than 90 percent of the new
loan amount.

SHARING THE NEW EQUITY

In order to discourage capable borrowers from taking
advantage of a write-down, the federal government and the
borrower would share in any future home price appreciation.

"The borrower must share the newly created equity and
future appreciation equally with FHA," the memo states. "This
obligation will continue until the borrower sells the home or
refinances the FHA-insured mortgage."

Mortgage servicers who pushed their loans through the new
program would be shielded from lawsuits from disgruntled
investors, according to the plan that imagines using $20
billion in government money to refinance approximately $400
billion in troubled mortgages.

Dodd's counterpart in the U.S. House of Representatives,
Rep. Barney Frank, has his own plan to expand the FHA. The two
lawmakers, both Democrats, would have to hammer out differences
between their two bills if they were ever to shepherd them
through each chamber.

Dodd, who is from Connecticut, and Frank, who represents
Massachusetts, are expected to take up the issue in earnest
when lawmakers return Monday after an Easter break.

Republican lawmakers are expected to express misgivings
about the plan and the potential liability for taxpayers.